Tuesday, 7 August 2012

07 Aug 2012 – “ Life on Mars? " (David Bowie, 1973)

Neutral to positive European open, following sanguine US and Asian close on the back of another leg up in EZ yesterday, following the Friday surge. Bonds a tick tighter throughout the EGB spectrum with Italy confirming yesterday’s close below 6% at 5.94% and Spain at 6.67%.

Equities up another 0.5%, before pushing further and weighting on Core bonds. Italian and Spanish 2-10s about flat at 289, respectively 324. EUR above 1.24, after trading a little weaker in Asia.

Still not sure what to make of the last 10 days. Won’t add to the general guessing game, but still remember Draghi’s comment about “There’s nothing without conditionality!” at the July ECB meeting.

Tons of open questions still abound. What is the ECB’s view of which conditions? Germany’s? Full bail-out? How short is the short end? Obviously, if Spain (and Italy) were to refinance themselves on forever rolled 3 to 6 months bridge loans, that won’t do in the long run. Seniority? Same question. Otherwise, we’ll end up with the whole debt in shorter maturities owned solely by the ECB and ESM/ESFS, as well as local banks. Conditions? Conditions?! Condi… What???!!! Nunca!

Add to that major (inner) (and outer) political risks, which would do without Monti suggesting to by-pass parliaments. That (supposed) comment will certainly backlash further (as today’s statement that Italy would now be at 1200 to Bunds with the late government and subsequent apology).

From where left 2 weeks ago, Italy is down some 20bp in 10s, Spain 40bp tighter and Germany is wider by 30bp, as someone will have to pay. The Soft Core weathered the news with a 15 to 20bp trade-off and France held best with under 10bp, which seems odd given the fact that it ranks as number 2 of the possible paymaster list.

Stunning equity performance with EStoxx up 14% from its lows 10 days ago.

Likewise surprising for the US. It seems odd to price-in both (one set of) good news as well as another round of QE, which is not there yet. That would be serious double-dipping.

As a reminder of the state of things, Italian Industrial production crashed 8.2% YoY (after 6.6%) in June and preliminary GDP data showed a 2.5% YoY decline in Q2 (from -1.4%). This led to a reversal of the earlier Periphery gains and to a sharp decline on the short end with both Italian and Spanish 2-10 curves flattening by 25 to 30 bp. Aiuto!

Took a while for equities to realize and to slowly come back from their 1.5% plus high. Not much reaction either to German Factory orders down a sharp -1.7% MoM after 0.7% and a -0.8% forecast. That’s -7.8% YoY, the worst since Oct 2009. Domestic demand down for the 6th month in a row. Foreign demand for capital goods down over 13% YoY. Engineering especially hit. Aua!

But, all is well; Ben & Mario will juggle it…

On the (short term) auction front, things were muted: Greece issued a small EUR 625m (before non-comps) at 4.68% (after 4.70%), knowing that it will need come back several times in the coming weeks in order to raise EUR 6bn to cover its August bond (at the ECB) and bill redemptions, so that might keep bidding to a strict minimum.

The EFSF accepted EUR 1.4bn of bids at -0.02% (Demand was 3 times the amount).

Germany will reopen its 10 YRS by EUR 4bn tomorrow, probably another reason for relative weakness in Bunds. Last auctions took place at 1.31% in July and 1.52% in June, so we’re closing at the cheaper end of both). COB 1.47%.

Noon picture with Core EGBs tighter by a couple of bps, Soft Core -1 to 2 tighter. Italy tighter by 7 to 5.91%, after having re-hit 6% after the Italian data, but reacting positively to the confidence vote being passed that should allow further spending cuts. Had likewise the short regaining some composure and some of the flattening corrected. Spain wider by a couple of bps, having hit 6.75% and the short end still soft with 2-10s at 300 (from 325 at open).

Equities still up 0.75%. Credit a tick wider, after the late gains. EUR holding above 1.24. Oh, yeah and we had the EU confirm a 120% debt to GDP ratio for Greece by 2020 (Ok, they do acknowledge that this is “ambitious”…) (to say the least) and that no one had yet asked for EFSF bond buying (ROFLOL). This one will remain a serious game of chicken.

To be correct, it is a series of games of chicken, as next to the different sovereigns, the ESM/ESFS, the ECB, and why not the IMF, below the sovereigns there are the regions, be it in Spain or, as it stands, in Germany. Oh, dear, oh, dear. Come on, haggle! (Life of Brian). Of course, one will have to agree that time is the essence, as if your think too long about all the pitfalls, you might end up sinking (link).

Positive US open, trailing along the lightness of being. With no shoe dropping, Risk is having a field day again…But not in Spain (2 YRS +32, 10 YRS +13)

Light on data and supply. Will have Germany increasing its 10 YRS by EUR 4bn tomorrow (last 1.31%, after 1.52%) tomorrow. Need to check Germany’s trade data tomorrow for signs of further weakening, too, and especially IP. Spanish IP tomorrow and housing on Fri. French production figures on Fri.

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These were close of business market reviews with my daily, personal musings about the state of things (mainly EUR-centric).

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